Is Solar Hot or Not?

The conventional wisdom these days is that solar is a very hot play indeed. A list of cleantech stock picks for 2014 has First Solar (a solar manufacturer) and SolarCity (a solar installer) at Nos. 1 and 2, respectively, and further down the list are a solar holding company, Renewable Energy Trade Board, and a solar equipment company, Meyer Burger.

There are many reports that the solar market is heading for a “second gold rush” this year; there’s little to dispute the fact that solar is definitely in, especially for investors.

It could be that the gold rush is already on.

Mercom Capital Group, a clean energy communications and consulting firm, notes in an annual report released earlier this month that 2013 was a very strong year for funding and M&A in the solar sector.

Total corporate funding last year was up 25 percent to $10 billion, according to the report. But the solar funding tide was not universally high, as global venture capital (VC) investments actually declined 40 percent to $600 million in 97 deals in 2013 compared to $992 million in 106 deals in 2012. And the venture capital funding trend for solar during the fourth quarter continued downward from a dollars viewpoint to $87 million (24 deals) from $197 million (28 deals) during the third quarter.

Mercom says that since mid-2012 the “new normal” for VC funding has been smaller funding quarters and smaller deal sizes. “While venture funding levels were down, overall fundraising was up and public market financings were really strong in 2013,” says Raj Prabhu, Mercom’s CEO. “Higher valuations among public solar companies have opened up the capital markets again as an avenue for fundraising at attractive terms. IPOs are back.”

The Mercom report says solar downstream companies saw the largest amount of VC funding in 2013 with $262 million in 34 deals, accounting for 45 percent of venture funding. Investments in commercial solar projects (CSP) reached $109 million in 12 deals and PV companies were close behind with $104 million in 17 deals. Thin film saw a 77 percent drop in funding from 2012, with $72 million in 2013 compared to $314 million a year earlier.

More from the report:

The top five venture capital-funded companies in 2013 were Chinese solar project developer Heifei Golden Sun Technology, which raised $69 million; followed by Clean Power Finance, a provider of third party financing for distributed PV projects, which raised $62 million; Solexel, a developer of high-efficiency crystalline silicon solar modules, brought in $55 million; Sungevity, a provider of residential solar installations, raised $43 million; and OneRoof Energy, a developer and operator of residential solar energy generation systems, raised $30 million.

The most active investor in terms of deal numbers was New Enterprise Associates, investing in three companies. New Enterprise Associates was also the top investor in 2012 with four deals. This was followed by Kleiner Perkins Caufield & Byers, PACA Investment, Firelake Capital Management, CCM US, and VisionRidge Partners all investing in two companies each.

Large-scale project funding announced in 2013 amounted to $13.6 billion in 152 deals, compared with $8.7 billion in 84 deals in 2012. Announced large-scale project funding in Q4 2013 increased as well, with $6 billion in 46 deals. The largest project funding deal announced in 2013 was the $1 billion bond financing completed by Solar Star Funding for its Solar Star 1 and Solar Star 2 projects. Top investors in large-scale projects were Kasinkornbank with 15 projects, and Bank of Tokyo-Mitsubishi UFJ with 10 projects.

Corporate M&A activity in solar amounted to $12.7 billion in 81 transactions compared to $6.7 billion in 51 transactions in 2012. M&A deal activity was up 59 percent in 2013 largely driven by strategic acquisitions and acquisitions of distressed assets. The largest M&A transaction in 2013 was the $9.4 billion acquisition of Tokyo Electron by Applied Materials, followed by ABB’s acquisition of Power-One, for approximately $1 billion. Shunfeng Photovoltaic International, acquired Wuxi Suntech Power, the main Chinese unit of Suntech Power Holdings, for $489 million, and Goldpoly New Energy Holdings acquired China Merchants New Energy Holdings in a non-cash transaction valued at $273 million. Dow Corning acquired Mitsubishi’s 12.5 percent stake in Hemlock Semiconductor LLC, giving it 100 percent ownership, and 12.5 percent in Hemlock Semiconductor Corporation, giving it 80.5 percent ownership.

Solar project M&A amounted to $1.7 billion in 2013, compared to $1.9 billion in 2012. Activity was up 20 percent year-over-year, with 112 transactions in 2013, compared to 80 transactions in 2012. Good solar projects with sound economics are in great demand.

Announced debt funding in 2013 totaled $6.2 billion in 38 deals, compared with $6.9 billion in 34 deals in 2012, and nearly $20 billion in 41 deals in 2011. The most active provider of credit in 2013 was China Development Bank, which provided debt funding for five Chinese solar companies.

Meanwhile, public market financings jumped considerably to $2.8 billion for 39 deals in 2013, up considerably from $893 million for 23 deals in 2012. Also last year, there were seven IPOs that together brought in more than $1 billion.

The Mercom report indicates that solar is already in a golden age, is much more than a fad or trend, and that there is lots of money available for projects. On the downside, venture capitalists appear more cautious, and debt funding is down, leaving the field clear for the stock market darlings. Beware the bubble.

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